BOJ Action Raises Developer Bond Sales to ’10 High: Japan Credit

Masaaki Shirakawa, governor of the Bank of Japan, is due to step down in April after a five-year term. Photographer: Kiyoshi Ota/Bloomberg

Oct. 31 (Bloomberg) -- Bank of Japan Governor Masaaki
Shirakawa’s decision to boost purchases of real estate funds to
stimulate the economy may spur debt sales by developers that
reached the highest in 2 1/2 years this month.

Daiwa House Industry Co., Japan’s biggest home builder, and
Mori Building Co. drove 97.8 billion yen ($1.2 billion) in
offerings by property issuers this month, the highest since
April 2010, according to data compiled by Bloomberg. The 9 basis
point yield premium over government debt that Daiwa House is
paying on its six-year notes compares with the 43 basis point
average for Japanese companies and the 168 gap for peers
worldwide, according to Bank of America Merrill Lynch indexes.

Refinancing debt at record-low yields will allow Daiwa
House, Mori Building and Tokyu Land Corp. to boost investment as
demand recovers for office space in central Tokyo. The yield
spread for Japan’s developers has dropped eight times faster
than the corporate average in the past year. It may narrow
further as the BOJ’s plan bolsters investor confidence in an
industry rebounding from record high vacancy rates.

“The BOJ’s additional stimulus measures and the increase
in Japanese REIT purchasing will improve the financing
environment for real estate and housing companies,” Roko Izawa,
a Tokyo-based analyst at Standard & Poor’s, said by telephone
yesterday. “The bond markets are likely to remain a stable
source of financing for the industry.”

BOJ Stimulus

The BOJ plans to increase its holdings of real estate
investment trusts to 130 billion yen in 2013, from the 120
billion yen expected this year, according to a statement from
the central bank yesterday. The holdings were at 100 billion yen
as of the end of September, it said.

The central bank expanded its asset-purchase fund, its main
policy tool, by 11 trillion yen to 66 trillion yen, it said in
the release. It added to monetary stimulus for the second time
in two months, the fastest pace of easing in nearly a decade, as
government data this month showed that consumer prices and
industrial output decreased.

The extra yield investors demand to own the debt of Japan’s
developers fell eight basis points in the past 12 months to 17
on Oct. 29, according to Bank of America Merrill Lynch indexes.
The spread for the country’s corporates narrowed one basis point
and dropped 91 for real estate companies worldwide, the data
show.

Tokyo’s office vacancy rate fell to 8.9 percent in
September from a record high of 9.4 percent in June as the
excess supply of new office space decreased, according to Miki
Shoji Co., an office brokerage company.

Office Rents

Mitsubishi Estate Co., Japan’s largest developer by market
value, expects a shortage of space in Tokyo’s Marunouchi
business district to allow it to raise office rents next year to
help reverse a decline in profit, President Hirotaka Sugiyama
said in an interview last month. Office vacancies pushed average
rents in Tokyo’s central five wards to the lowest ever in
September, according to Miki Shoji.

“We expect office rents to rise in Tokyo’s five central
wards,” Masahiro Mochizuki, an analyst at Credit Suisse Group
AG, said in a report on Oct. 26. “The vacancy rate for
relatively new buildings has declined to a point that will
support an uptrend for asking rents for new tenants,” he wrote,
referring to buildings up to 10 years old.

J. Front Retailing Co. hired Nomura Holdings Inc. to sell
about 10 billion yen of three- and five-year notes, the
brokerage said in a statement yesterday.

Bond Return

Japan’s corporate bonds have handed investors a 0.04
percent gain this month, matching the return on Samurai notes,
Bank of America Merrill Lynch data show. Company debt worldwide
has gained 0.99 percent in the period, according to the data.

Yields on Japan’s benchmark 10-year government debt fell
half a basis point to 0.765 percent in Tokyo yesterday. The rate
was as low as 0.72 percent on July 23, the least since June
2003. The bonds yielded 95 basis points less than similar-maturity Treasuries, versus 128 a year earlier, data compiled by
Bloomberg show. One basis point is 0.01 percentage point.

The yen rose after the BOJ’s easing, and was up 0.5 percent
to 79.41 per dollar as of 6:56 p.m. yesterday in Tokyo. The
Japanese currency depreciated to 80.38 per dollar on Oct. 26,
the weakest since June 25.

Capitalization Rate

The capitalization rate, a measure of investment yield, for
Japanese office buildings was 5.3 percent in July after
declining from 5.4 percent in April, according to Real Capital
Analytics Inc. A drop in the cap rate, which is a property’s net
income divided by the purchase price, usually signals an
increase in real estate prices.

Hulic Co., Japan’s best-performing real estate company,
registered in July to sell as much as 50 billion yen of bonds.
Borrowing rates under 1 percent mean that redevelopment projects
offer more than 10 percent return, according to spokesman Shin
Ito.

“The spread is narrow enough and the cost of issuance is
extremely low,” said Ito in a telephone interview. “This is
the perfect timing and environment for real estate companies, if
the market starts rebounding. We can see signs of that
already.”

Bond Pipeline

Mori Hills REIT Investment Corp. hired banks for a sale of
three-year and five-year notes, according to an Oct. 29
statement from SMBC Nikko Securities Inc., which will manage the
offering together with Mitsubishi UFJ Morgan Stanley and Mizuho
Financial Group Inc.

Daiwa House sold 30 billion yen of notes, including 10
billion yen of 0.249 percent four-year bonds and 20 billion yen
of 0.413 percent six-year debt, according to data compiled by
Bloomberg. Both securities are priced to yield nine basis points
more than government debt, the data show.

“The calming of the financial markets and expectations of
investor demand going forward prompted us to choose to refinance
our bank loan with a bond issue,” said Noboru Kaiho, a
spokesman at Daiwa House.

Daiwa House expects profit to surge 75 percent to 58
billion yen for the year ending March 31, as sales gain 2.8
percent, the home builder said in August. That compares with the
average estimate for a 61.2 billion yen income by 10 analysts
compiled by Bloomberg.

“The market environment is very receptive to real estate
borrowers right now, which may prompt some companies to push
forward their bond offerings,” said Mitsuyoshi Takahashi, a
senior credit analyst at Mizuho Securities Co., a unit of
Japan’s leading bond underwriter this year. “Positive earnings
expectations are helping tighten the spreads for the industry.”